Time to Revisit an ASEAN-EU FTA?

Much has changed since 2007, when FTA talks were first attempted.

By Ji Xianbai for The Diplomat

June 03, 2015

On May 19, 2015, the European Union (EU) adopted a Joint Communication: The EU and ASEAN: a partnership with a strategic purpose. The communication calls for taking “trade relations with ASEAN to a different level and working towards an ambitious region-to-region free trade agreement (FTA) building on bilateral agreements between the EU and ASEAN Member States.” Senior officials of ASEAN and the EU will gather towards the end of 2015 to take stock and explore the way forward after identifying the advantages and pitfalls that a ASEAN-EU free trade initiative might entail.

In fact, ASEAN and the EU began negotiating a similar arrangement in 2007, but the talks quietly broke off two years and seven rounds later, primarily over the troubled human rights record of Myanmar, a country that had been internationally isolated since the early 1960s. As a normative power, the EU has a legal obligation under the Lisbon Treaty to incorporate human rights issues into external trade and investment frameworks, to ensure that the economic benefits do not come at the expense of human rights abroad. It therefore baulked at including Myanmar in the talks. With a region-to-region FTA on ice, the EU shifted its approach to forging closer bilateral trade ties with four individual ASEAN member states: Singapore, Malaysia, Vietnam and Thailand. The EU-Singapore FTA has been concluded in 2012 and is in the process of being ratified.

And indeed, despite the fruitless attempts at the regional level, bilateral economic ties have gone from strength to strength. ASEAN is the EU’s third largest trading partner outside Europe, after the U.S. and China, with more than €179.2 billion ($195.7 billion) in trade in goods and services in 2014. The EU was ASEAN’s second largest trading partner, behind only China, in 2013. Accounting for 22 percent of foreign direct investment (FDI) inflows to ASEAN, the EU is the region’s largest foreign investor, with more than 10,000 European companies operating in Southeast Asia. The EU is also the most generous donor to the ASEAN Secretariat, with plans to more than double financial assistance in support of ASEAN integration to €170 million over the period to 2020.

At a joint conference in Malaysia on the sidelines of the 26th ASEAN Summit where the rekindled interest in an inter-regional FTA was announced, European Trade Commissioner Cecilia Malmström reckoned that “many things have changed in Europe and here (in ASEAN),” adding that now is the right time to consider a resumption of ASEAN-EU trade talks. So what major developments have taken place since 2007 that might pave the way for a revived trade accord between the two blocs?

First, Myanmar has improved its human rights scorecard since it emerged at last from repressive military rule in 2011. Under the presidency of Thein Sein, and leaving aside the notorious humanitarian and human rights crisis in Rakhine state – admittedly very much at the forefront of public awareness right now – there have been significant decreases in systemic human rights abuses and violations committed by the central government against ethnic minorities and political dissidents within its majority Burmese population. Myanmar’s government has also taken concrete steps to combat corruption and strengthen rule of law. Between 2005 and 2013, its Control of Corruption and Rule of Law indices in the World Bank Governance Indicators improved impressively from -1.6 for both to -1.1 and -1.2, respectively. In response, the EU has lifted economic sanctions and re-granted Myanmar preferred trading status through the Generalised System of Preferences in 2013. While much remains to be done, a normalized EU-Myanmar relationship is gaining momentum in the economic sphere and the “Myanmar problem” is arguably no longer the stumbling block to a potential ASEAN-EU FTA that it once was.

Also muddying the water last time around were the difficulties posed by the enormous economic developmental disparities and trade policy peculiarities among the ten states of Southeast Asia. However, in the past decade ASEAN has made significant strides in economic development and income distribution. Nominal GDP for the bloc has risen from $1.3 trillion in 2007 to $2.4 trillion in 2013, while GDP per capita has climbed from $2249 to $3832 over the same period. The income gap among ASEAN countries is also closing rapidly: GDP per capita of the richest economy was 105 times larger than that of the poorest in 2007; in 2013, that gap had been reduced to 62 times, and by 2018 it is projected to be 47 times. The higher growth rates of smaller economies, especially of the CLMV (Cambodia, Laos, Myanmar and Vietnam) group, will continue to drive economic convergence in the region. The CLMV’s share of ASEAN GDP in 2007 stood at 7 percent; by 2013, it had advanced steadily to more than 10 percent. Moreover, macroeconomic policies in ASEAN are more coordinated and harmonized compared to those in 2007.

In contrast, the EU economy is again struggling with deflation in 2015, underscoring the anemic recovery efforts of the eurozone and the failure of conventional policy instruments. Clearly, the EU needs to embrace a wider range of economic stimulus tools; quantitative easing alone is insufficient and carries a catastrophic inflation risk for future generations if tapering is delayed. Using an FTA to open up otherwise heavily regulated markets in rapidly growing Southeast Asia is a risk-free option in tough economic times. The proposed FTA would boost inter-regional commerce and promote growth and job creation in Europe. Malmström made no secret of the economic motivation behind the ASEAN-EU deal, viewing it as a way for the EU “to come out of the current crisis.” More than ever before, the EU needs an ASEAN-EU FTA.

In addition, ASEAN is at the heart of two high-profile mega-FTAs: the Trans-Pacific Partnership (TPP) around the Pacific Rim and the Regional Comprehensive Economic Partnership (RCEP) between ASEAN and its six FTA partners, including China, Japan and India. These two giant trade initiatives will inevitably draw ever more economic activities and FDI to the region and away from the transatlantic community, to the detriment of the EU. Home to a number of a populous, lower-income developing countries, from a supply chain point of view, ASEAN is set to absorb the majority of the labor-intensive manufacturing industries that are relocating from China. For the EU, a future ASEAN-EU trade deal is an opportunity to dock with the two major trade accords and retain its economic prominence.

Why post-2015?

From the ASEAN perspective, resuming free trade talks this year works for two reasons. First, as ASEAN Deputy Secretary General for ASEAN Economic Community, Lim Hong Hin, has put it, it is “good timing to revisit the region-to-region FTA will be after the realization of the AEC at the end of 2015.” Back in 2007, there was a lack of genuine interest in the region, as the prevailing view in policy circles was that the objectives of the ASEAN Community and ASEAN-EU FTA were incompatible, given that the former prioritized inward-looking regional community building while the latter encouraged the region to be more outward-looking. Indeed, ASEAN has been preoccupied with the AEC agenda for more than a decade since 2003. After 2015, though, trade talks with the EU could become a new priority for ASEAN leaders.

Second, the RCEP agreement is on course to be concluded by the end of 2015. With the conclusion of RCEP, attention could well switch to an ASEAN-EU FTA. The negotiating skills and technical expertise ASEAN trade negotiators and lawyers have picked up in dealing with large and savvy trading powers such as China and Japan will prove beneficial. The RCEP negotiation itself is a consensus-building process through which economically diverse ASEAN countries identify and work together toward common external positions on numerous trade-related matters, particularly the intractable “Singapore issues” that have plagued the multilateral Doha Development Round under the WTO. In light of this, RCEP negotiation could be appreciated as a capacity-building, preparatory process preceding the potentially more contentious free trade talk with the EU for ASEAN.

Rejuvenating ASEAN-EU FTA talks after 2015 would be a win-win scenario. With the launch of the AEC and conclusion of RCEP, a consolidated ASEAN will be a more cohesive, strategic and symmetric FTA partner. Moreover, the EU’s commercial interests would be served by synergies between the proposed FTA, the AEC, which aspires to transform a diverse Southeast Asia into an integrated market and a production base of 625 million people, and RCEP, which would indirectly link the EU and its top trading partner, China. Thirty-five years after the EU and ASEAN signed their inaugural inter-regional cooperation agreement, it is time to consider upgrading the relationship from an Enhanced Partnership to a Strategic Partnership. An ASEAN-EU FTA could well be the stepping stone to do that.

Ji Xianbai is PhD candidate at S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore on the prestigious Nanyang President’s Graduate Scholarship (NPGS). He is also Associate Fellow at European Union Centre in Singapore.